Most investors in the stock market are fully familiar with the activity of day trading in which a stock trader makes repeated trades during the day, often holding a position for mere minutes at a time and even as short as computer driven fractions of a second at the big trading houses.
In contrast, but just as familiar is the practice of buy and hold where an investor may own a position for years as dividends are collected and the share price appreciates. The holder of this position may only check company developments once a quarter or less. Think big-time successful investors like Warren Buffett or Peter Lynch.
Lying between these two extremes, but certainly biased towards the short term, is the investing practice known as Swing Trading. In this arena, investors try to take advantage of short-term price movements, anywhere from minutes to days or weeks, and seek to earn a healthy return over a short time period.
Swing trading can provide a lot of flexibility as it does not require being fully invested in the market at any one time. Instead, an investor can patiently search for low risk opportunities attempting to grab the majority of profit available in a significant price move up or down.
Swing traders are also similar to day traders in that they use stock price charts and signals or indicators that inform them when to enter and exit a position. And successful practitioners must fully adhere to their proven systems in disciplined fashion if they expect to be around for the long haul. This is not a place to let emotions and gut feelings take over as when to buy or sell is every bit as important as what stock is chosen. A swing trader will act first and ask questions later.
The great upside to a proven trading system is that investment positions can be analyzed and finalized after the market has closed when activities are less hectic and cooler minds can prevail. A savvy investor can employ their techniques in just 20 minutes during the evening and have their orders entered and ready to go for the next day.
There are some general principles to bear in mind when swing trading.
First off, the trend is your friend. Stock prices may appear random at first glance, but about a third of the time they are trending upwards or downwards. The remainder of their movement tends to be flat or sideways. So the job of a profitable swing trader is to identify these trends as they emerge, or when they reverse themselves.
Next, is time, specifically the duration of it. While there is no perfect length of time over which to trade, generally speaking, the shorter the better. This means less time looking at charts and sweating over price movement thus letting discipline wane and emotions rule.
Third, is support and resistance levels or the general direction of price movements. A support and resistance uptrend consists of higher highs and higher lows. The other side of the same coin is a downtrend or lower highs and lower lows. By using these patterns, the trend lines of these highs and lows can be observed and acted upon.
A fourth element to be aware of is the “up trend” and “down trend”. For example, most times when a price drops to or near its uptrend line but then resumes its advance, the trend line has acted as a support level indicating the price movement is in an uptrend.
Conversely, most times a price rises to its downtrend line but then resumes its decline, the downtrend line has acted as resistance to upward move of its market price and it will resume its fall. However, once the particular trend has been violated, the roles are reversed and the previous resistance becomes support and the previous support becomes resistance.
Then there are the “moving averages”. These chart lines are used to smooth out the perceived randomness and erratic price movements of stock prices over some period of time; often 10, 20, 50, and 200 days. This minimizes price fluctuations on the price chart and helps identify underlying values and trigger points.
Finally there are “stop losses”. This is the level or price at which the trade should be closed. At this point the price movement has traveled too far from the entry point and therefore negates the fundamentals for being in the trade.
Once a trade is entered, an appropriate stop loss must be placed to protect one’s self from an account debilitating misjudgment. It is far easier to take a small loss and move on than sustain an increasingly bad position and lose one's shirt.
All in all, swing trading can produce regular profits when using sound fundamentals and trading systems while also allowing the intrepid trader to not get twisted into an emotional pretzel or spend hours staring at charts and indicators while making multiple trades a day.
Additionally, it leverages the fact that most fundamentals are quickly baked into the market price so it relies on inevitable up and down trends to come out ahead
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